Interbank Payments and the Daily Federal Funds Rate

By Craig Furfine. 2000

174 citations recorded by the source corpus.

This paper develops a model of bank reserve management and federal funds rate determination that incorporates the role of interbank payments. In the model, uncertainty in the receipt of payments generates a precautionary demand for bank reserves as banks face both reserve requirements and penalties for overnight overdrafts. Days with higher payment volume are assumed to create more uncertainty in a bank's reserve account that accentuates this precautionary motive. As a result, upward pressure is placed on the equilibrium funds rate. Implications of the model are then estimated using a panel of large banking institutions. Using the parameter estimates, simulations of the model suggest that patterns in payment activity explain many intra-maintenance period movements in both the level and volatility of the federal funds rate.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/c38d81d06cd714dbf48ad6929bd0225961cbebf3

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Citations in the corpus

LIQUIDITY AND ANNOUNCEMENT EFFECTS IN THE EURO AREA (2008, background): “…limits on credit lines and transaction costs (Hamilton, 1996; Clouse and Dow, 1999), the role of reserves for the interbank payment system (Furfine, 2000), risk-aversion on the part of money market operators (Angelini, 2000). predictions derived from a simple theoretical model of reserve…”
Precautionary Hoarding of Liquidity and Inter-Bank Markets: Evidence from the Sub-Prime Crisis (2010, unknown): “Next, we write the interbank market rate rt as a linear function of both lt and Pt : rt = γlt + δPt + εrt (6) That the market rate on a given day is a direct function of the payment activity on that day follows from Furfine (2000).”
The euro area interbank market and the liquidity management of the eurosystem in the financial crisis (2010, background): “6See, for example, Ho and Saunders (1985), Hamilton (1996), Clouse and Dow (1999, 2002), Furfine (2000), and Bartolini, Bertola, and Prati (2001, 2002).”
Implementation of Monetary Policy: How Do Central Banks Set Interest Rates? (2010, methodology): “60 8 Conclusion 63”
Monetary Theory and Policy, 2nd Edition (2003, background): “Recent examples include Furfine (2000); Furfine and Stehem (1998); and Heller and Lengwiler (2003), who allow banks to balance liquidity costs against the cost of liquidity management.”